By Tiernan Ray

Greenlight Capital‘s David Einhorn this morning was on CNBC, imploring his “friends” among Apple (AAPL) shareholders to vote against proposition number twoin Apple’s proxy statement for its annual shareholder meeting, which would prevent issuance of preferred stock.

Einhorn’s contention is that Apple has a “Depression mentality,” like some people who grew up during The Great Depression, and hoards cash.

Apple stock has been rising in pre-market trading following Einhorn’s presentation, and is currently up $6.15, or 1.3%, at $463.50. The shares now continue gains as the session gets underway, rising $5.15, or 1%, at $459.85.

He wants the company to issue perpetual preferred shares with a 4% dividend yield.

People who’ve gone through traumas, they sometimes feel they can never have enough cash. I remember my grandma Roz. She was a depression-era child. She wouldn’t leave me a message on my answering machine because she didn’t want to get charged for the phone calls.

Einhorn thinks that for every $50 billion bucks that Apple were to release to shareholders, it would generate $32 per share in Apple stock. Ergo, if the company were to issue $500 billion in payouts, it would unlock $320 per share.

Right now, Apple’s got one common equity security that has all the volatility related to earning. There’s a tremendous demand for high quality interest income. We think if they distributed preferred stock with a 4% yield there would be tremendous demand for it. Sell the preferred to people who want it. $50 billion unlocks $32 per share in apple. Issue $500 billion and unlock $320 per share.

Einhorn described his proposal as a “win-win”: “Apple gets to keep all its cash, and we, the shareholders, get to keep the value embedded in the stock.”

Apple’s proposition number two reads:

To amend the Company’s Restated Articles of Incorporation to (i) eliminate certain language relating to the term of office of directors in order to facilitate the adoption of majority voting for the election of directors, (ii) eliminate “blank check” preferred stock, (iii) establish a par value for the Company’s common stock of $0.00001 per share and (iv) make other conforming changes as described in more detail in the Proxy Statement.

Asked if he was still long Apple shares, Einhorn said yes. He said Greenlight has owned it since 2010 and owns “more Apple today than we ever have before.”

Asked for his fundamental assessment of Apple, Einhorn responded:

Apple’s fantastic. They made over $20 billion in cash last quarter. That’s more than Amazon[.com (AMZN)] has made in its entire life. And both of these trade at the same price to sales. It’s utterly mis-valued. That’s because there’s a lot of noise. But I think they’re doing incredibly. I think the stock will do very well, but I think if they do what we’re suggesting, they’ll do exceptionally well.

Jim Cramer, responding on CNBC to Einhorn, at first responded, “What the heck is he talking about? I want them to grow, I don’t want a preferred,” and then suggested Apple could buy Twitter. However, later in the segment, Cramer said Einhorn was right that Apple was not sufficiently shareholder friendly. He said it was unfair of Apple to listen to Einhorn’s proposal and then specifically come out with a proxy measure banning that proposal.

Cramer then turned around and said, “You can see from their position, they’re thinking, what are we supposed to do? We created the largest cap company. If you’re not happy, sell the stock.”

Einhorn is separately suing Apple to have prop 2 unbundled from the proxy.

Greenlight Capital, Inc. (and affiliates, “Greenlight”) has been a significant shareholder of Apple Inc. (“Apple” or the “Company”) since 2010. We believe Apple is a phenomenal company filled with talented people creating iconic products that consumers around the world love. We are long-term shareholders of Apple.

However, like many other shareholders, Greenlight is dissatisfied with Apple’s capital allocation strategy. The combination of Apple’s low (and shrinking) price to earnings multiple and $137 billion (and growing) hoard of cash on the balance sheet supports Greenlight’s contention that Apple has an obligation to examine all options to create and unlock additional value.

We understand that many of our fellow shareholders share our frustration with Apple’s capital allocation policies. Apple has $145 per share of cash on its balance sheet. As a shareholder, this is your money. Though Apple recently commenced paying a common dividend and initiated a nominal share repurchase program, we believe that there is much more that the Board should do for shareholders. We believe that it is important for shareholders to send Apple’s Board the message that the current capital allocation policy is not satisfactory, and that after considering all options, Apple’s Board should act to unlock the latent value of Apple’s balance sheet and franchise. If you share our frustration, please join us in blocking the Company’s effort to restrict its value creation options by voting AGAINST Apple’s plan to amend its corporate charter in Proposal 2 to eliminate preferred stock.

At a May 2012 investment conference, Greenlight introduced the idea that Apple could unlock several hundred billion dollars of shareholder value by distributing to existing shareholders a perpetual preferred stock.

Since then, Greenlight has had discussions with Apple encouraging the Company to distribute perpetual preferred stock as an innovative method of rewarding all shareholders for the Company’s strong balance sheet and substantial cash flows. Put plainly, Greenlight is encouraging Apple to distribute a perpetual, high-yielding preferred stock directly to shareholders at no cost. This would enable shareholders to own and separately trade the new preferred shares and Apple’s existing common shares. Importantly, Greenlight believes these preferred shares represent a simple, low-risk way to reward shareholders without compromising the financial and strategic flexibility of the Company, or forcing the company to incur tax on repatriating its offshore cash balances.

Greenlight suggested an initial preferred share distribution, whereby dividends could be funded on an ongoing basis by a relatively small percentage of the Company’s operating cash flow. Apple rejected the idea outright in September 2012. Yesterday, after Greenlight notified Apple of its intention to vote against Proposal 2, Apple said it would reconsider the idea, but refused to withdraw the proxy provision where Apple seeks to eliminate preferred stock from its charter.

The recent, severe under-performance of Apple’s shares, which are down approximately 35% from their peak valuation, underscores the need for the Company to apply the same level of creativity used to develop revolutionary technology for its consumers to unlock the value of its strong balance sheet for its shareholders.

We believe our suggestion of distributing perpetual preferred stock, while innovative, is also quite simple. Apple could distribute high-yielding, tax efficient preferred stock to existing shareholders at no cost. This new type of easily tradable preferred security would allow Apple to take advantage of the market’s appetite for yield while preserving future operating and strategic flexibility. Importantly, we believe this strategy would require no immediate use of cash other than the ongoing dividend, and would not pose any maturity, re-financing, balance sheet, or default risk.

For example, Apple could initially distribute to existing shareholders $50 billion of perpetual preferred stock, with a 4% annual cash dividend paid quarterly at preferential tax rates. Once a trading market is established and the market recognizes the attractiveness of a highly liquid, steady yielding instrument from an issuer backed by Apple’s unmatched balance sheet and valuable franchise, the Board could evaluate unlocking additional value by distributing additional perpetual preferred stock to existing shareholders. With this conservative action, Greenlight believes the Board could unlock hundreds of billions of dollars of latent shareholder value.

Assuming Apple retains its price to earnings multiple of 10x and the preferred stock yields 4%, our calculations show that every $50 billion of perpetual preferred stock that Apple distributes would unlock about $30 billion, or $32 per share in value. Greenlight believes that Apple has the capacity to ultimately distribute several hundred billion dollars of preferred, which would unlock hundreds of dollars of value per share. Further, Greenlight believes additional value may be realized when Apple’s price to earnings multiple expands, as the market appreciates a more shareholder friendly capital allocation policy.

As holders of more than 1.3 million Apple shares, Greenlight is alarmed that Apple is attempting to eliminate preferred stock from its corporate charter, hindering its ability to unlock value for shareholders. This is an unprecedented action to curtail the Company’s options. We are not aware of any other company that has ever voluntarily taken this step. Furthermore, over 90% of the S&P 500 companies have the flexibility to issue similar preferred shares.

Apple is attempting to package this provision with two positive corporate governance reforms that we would normally support. Apple is asking shareholders to approve or disapprove of all three changes in a single bundled vote.

We believe that the Securities and Exchange Commission (“SEC”) proxy rules require that Apple provide for a separate vote on each matter presented to its shareholders for approval at the shareholder meeting. This ‘unbundling’ rule is designed to permit shareholders to express their vote on each individual matter and to not be forced to vote on a combined package of items. This prevents companies from forcing shareholders to approve matters that they might not vote for if presented independently.

In our view, Apple’s Proposal No. 2 violates the SEC’s ‘unbundling’ rule because it ties together three separate matters (majority voting for directors, elimination of preferred stock, and establishing a par value for the Company’s common stock) into one proposal. Apple should be required to unbundle these items into separate proposals to allow the shareholders to make an independent choice on each matter. Accordingly, Greenlight has initiated a legal action in the U.S. Federal District Court for the Southern District of New York seeking to have the Company unbundle the various components of Proposal 2 so that shareholders can rightfully vote on each individual provision as mandated by SEC rules.

We cannot support the two desirable governance reforms at the expense of limiting Apple’s ability to potentially unlock hundreds of billions of dollars of shareholder value. Importantly, in its current form, voting AGAINST Proposal 2 does not affect the ‘majority voting’ reform in the short-term, as Board members have already agreed to resign from the Board if they fail to receive a majority of votes cast “for” their election. As a result, we will vote AGAINST Proposal 2 in Apple’s proxy and we urge you to vote AGAINST the proposal, as well.

Proposal 2 Is Value Destructive, Impedes The Board’s Flexibility,

And Does Not Merit Shareholder Support

Your vote is extremely important, regardless of how many shares you own. Apple shareholders of record as of January 2, 2013 are entitled to vote at the annual meeting. Proposal 2 requires the affirmative vote of a majority of the outstanding shares. If you were an Apple shareholder on the record date, you can still vote AGAINST Proposal 2, even if you already voted your shares.

Greenlight is not asking for your proxy card, so please do not send us your proxy card. If your Apple shares are held in your own name, please vote AGAINST Proposal 2. If you hold your Apple shares in “street name” with a bank, brokerage firm, dealer, trust company or other nominee, only they can exercise your right to vote with respect to your shares and only after receiving your specific instructions. IT IS CRITICAL THAT YOU PROMPTLY GIVE INSTRUCTIONS TO YOUR BANK, BROKERAGE FIRM, DEALER, TRUST COMPANY OR OTHER NOMINEE TO VOTE “AGAINST” PROPOSAL 2. If you have any questions about voting your Apple shares, please call our proxy solicitor, D.F. King & Co., Inc., toll-free at (800) 949-2583 (banks and brokerage firms should call (212) 269-5550), or email apple@dfking.com.

Add a Comment

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comment

There are 13 comments

FEBRUARY 7, 2013 9:21 A.M.

Beltway Greg wrote:

Einhorn is correct.

FEBRUARY 7, 2013 9:30 A.M.

aapl wrote:

are you kidding me
aapl is a hot air balloon
why are we propping this dog up?
cook is hoarding the cash not giving us investors a dime- there's no new products this quarter
except more expensive ipads- etc....
just keep shorting

FEBRUARY 7, 2013 9:33 A.M.

aapl wrote:

Einhorn is probably the sheep that bought in @ 700 and is loosing big

FEBRUARY 7, 2013 9:48 A.M.

Ed wrote:

Now finally someone who knows what they are F doing l;ike Einhorn has had enough with Apple's BULL!! Unlike Doug Kass, who hasn't a F clue, Ein horn will make shareholders wealthy again. Do not F with Einhorn! It's about F time someone with deep pockets tells Apple and Cook how to run a company!!!!!!

FEBRUARY 7, 2013 10:23 A.M.

Jake_in_Seoul wrote:

As an AAPL shareholder, I like Einhorn's idea and support it. Surely a global cash hoard approaching $140 billion is sufficient to meet operating contingencies. Since much of this money is still abroad, perhaps there is a clever way for securities lawyers to issue preferred shares from a foreign Apple subsidiary paying, say, in Hong Kong dollars?

FEBRUARY 7, 2013 10:24 A.M.

Peter wrote:

Will someone step on the midget Doug Kass. What the F does he know about investing and why the F are you giving him any time? His track record sux! Einhorn or Kass? Please....

FEBRUARY 7, 2013 10:25 A.M.

Rottan Frewt wrote:

Apple is a terrible investment. Amazon is rising. Netflix is rising. Even RIM is rising. Apple has more cash than all three of them combined and Apple is falling. Apple stock is toxic waste. Stay away. Any company that has no interest in shareholders should not be touched by investors. You'll only feel pain and no gain. The only one's making money from Apple is Apple's executive inner circle. They've got swimming pools full of cash they dive into every day. They use the $137 billion cash hoard to drive around in Bugatti Veyrons. It's their executive equivalent of a piggy bank. Shareholders will never see any of that cash.

I hope Einhorn did buy in at $700 hoping Apple was going to $1000. Now he has to eat Apple slices at $450 a share. Apple is one of the biggest if not the biggest value trap on Wall Street. Money goes in but never comes out. It just ends up in the executive piggy bank, mostly offshore. There's talk of Apple dropping to $200 and I wouldn't be surprised if it did because absolutely nothing is holding up that stock in terms of shareholder value.

FEBRUARY 7, 2013 11:28 A.M.

StonehamMel wrote:

Good news, bad news - you can always count on the same Apple-bashers to spin it negative.

The guy's been a shareholder since 2010. He clearly didn't buy in at 700. He hasn't sold and is making no noise that suggests he's selling. $145 cash on hand per share? Stunning. Yet the bashers compare them to hot-air balloons like Amazon and Netflix - good companies, but with P/E not close to Apple.

I agree with Einhorn - there's a ton of unappreciated value in Apple. If you trust management - and I do - you trust that the same team under Cook and Ive will deliver the same amazing products in good time. The market opinion on AAPL is down now...whoop-de-doo. My portfolio has been going steadily up because I am DIVERSIFIED.

Are you? Because if you are, you can wait until the next new product comes out, is bashed by the haters and deprecated by the techno-geeks - and then, goes orbital with the public, as in the past.

FEBRUARY 7, 2013 12:02 P.M.

bud u. wrote:

There are two sources of "financial" info that NOBODY in their right mind should pay attention to. One is Calpers, the other Jim Cramer, both have atrocious track records. Calpers should be broken-up, and Cramer should be arrested for impersonating a financial advisor. His Uncle must own Comcast, there is no other rational explanation for his presence on CNBC.

FEBRUARY 7, 2013 3:28 P.M.

drew wrote:

put your money where your mouth is, go and sell everything you have and 'invest' in appl

FEBRUARY 7, 2013 4:13 P.M.

Candy wrote:

I seldom vote my shares. But the media stories woke me up on this one and I've voted against prop 2. I agree with Einhorn that the proposals in it ought to be unbundled. Also voted For the other measures that shareholders had put on the ballot - which management asked that we vote Against.

FEBRUARY 7, 2013 4:17 P.M.

AAPL is a Buy! JMHO. wrote:

I want NOISE! Give me lots of positive noise. Argue argue argue! Fight fight fight! And the stock will go up up up! Everyone will wonder what the heck is going on?! It has to be good! Buy buy buy! This never fails. Besides. Last quarter Apple made $20 billion: Amazon in its entire history has not made that much...

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.